Where must a retired person invest to get regular monthly income with appreciation of principal amount?
Instead of looking at retirement as an age, it would be prudent to view it as a phase in an individual’s life, wherein one is looking to derive income out of the corpus that has been accumulated over time.
Hence, the primary objective during retirement should be to derive stable income from his/her portfolio adjusted for inflation, and not wealth creation.
Ideally, an asset allocation-based approach (mix of equity, debt, commodities, real estate, gold) should be followed while investing. Having said that, it is crucial to have reasonable return estimates for the underlying asset classes as it helps to form realistic withdrawal expectations given the principal invested, to be able to meet the withdrawals with a reasonable degree of confidence.
Equity
While equities have the potential to deliver superior inflation-adjusted returns compared to fixed-income, they are much more volatile and entail the risk of a capital loss over the short term. Hence, subject to an individual’s risk appetite one should have a low exposure (5 to 15%) to the equity asset class, else withdrawals during periods of severe losses in equity markets can severely dent the portfolio. This is because during a subsequent recovery in equities, the corpus that remains invested post the withdrawals would be low and hence post recovery the corpus (adjusted for the withdrawal) would be much lower than before the downfall.
Debt
For your desired objective of monthly income with some capital appreciation, you could look to invest with a portfolio mix of about 10% into equities (entirely into large-cap funds) and 90% into fixed-income funds to mitigate portfolio risk. The fixed-income exposure can be spread across Arbitrage and money market funds (20%), shorter duration funds (50%), and medium and longer duration funds (20%). The money market funds would provide the initial withdrawal corpus as such funds entail low volatility given their investments into low-risk instruments.
You could also look to invest the debt portion into pension annuities, post office savings schemes such as the Senior Citizen Savings Scheme (SCSS), Monthly Income Scheme (MIS) and the Pradhan Mantri Vaya Vandana Yojna, which may offer slightly higher interest rate and are subject to caps on the maximum amount that can be invested.
Taxation
Interest earned from the above small savings schemes and from fixed deposits are all taxable at the marginal rate in your hands. Compared to these options, debt mutual funds would serve you better from a post-tax perspective. For holding periods of more than three years, debt mutual funds are taxed at 20% after indexation of costs. This significantly lowers your tax outgo.
Dividends from mutual funds are taxed in the hands of the investors, at the marginal rate of tax, as applicable. Hence, for investors facing a marginal tax of 20% and above, it is advisable to invest in growth plans and then withdraw periodically via the SWP route.
Diversification and Rebalancing
One should be reasonably diversified and avoid concentrating exposure in a single fund or fund house. Monitor your portfolio at appropriate intervals and re-balance the asset allocation back to the recommended allocation in case of any material drift due to subsequent market movement.
This is important.
It is recommended to have an Emergency Fund in place worth at least six months of expenses, and sufficient medical cover for the entire family, to avoid withdrawing sizeable amounts from the invested corpus.
Articles authored by senior investment analyst Mohasin Athanikar
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